Friday, October 31, 2014

Solid Q3 growth in America

September quarter US GDP growth came in in at a respectable annualised rate 3.5%.  That was slightly higher than average market expectations.  Furthermore, the detail of the result was suggestive of solid momentum in the US economy.

Personal consumption growth was held back over the quarter by soft growth in services.  That appears to have been the result of a mild summer and the resultant impact on utilities spending however consumption of durable goods posted a robust 7.2% annualised increase.

Private investment growth was held back by a negative contribution from inventories.  Residential investment looked soft with an annualised increase of 1.8% but disappointment needs to be tempered by observing that followed an 8.8% increase in the prior quarter. But growth in investment equipment came in at 7.2%.  All good.

Net exports was due a positive bounce after two negative quarters and didn’t disappoint with a 1.3% percentage point contribution to the overall result.  Expect that to revert to a negative contribution next quarter.

To look through the noise in any GDP result the best number to focus on is real final sales.  That came in at an annualized 4.2% in the quarter, up from 3.2% in the June quarter and the strongest result since the increase of the same magnitude in fourth quarter of 2010.  To me that’s indicative of an economy that’s building growth momentum.  This result lifts our annual average GDP growth forecast for 2014 slightly to 2.3% (from 2.2%) and supports our expectation of around 3.0% growth in 2015 and 2016.

There are no monetary policy implications in this result other than to give the FOMC increased confidence that growth in the economy is on a firm footing and that further normalisation of monetary conditions will be appropriate in time.